Disclaimer & Disclosures: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it https://www.research.hsbc.com China and the world New Frontiers, Fresh Connections China’s relationship with the world is changing... ...as its role in the global economy grows ever more complex… ...bringing unprecedented opportunities and challenges for countries everywhere ECONOMICS GLOBAL May 2016 By: Julia Wang and James Pomeroy
Transcript
Disclaimer & Disclosures: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
https://www.research.hsbc.com
China and the worldNew Frontiers, Fresh Connections
China’s relationship with the world is changing...
...as its role in the global economy grows ever more complex…
...bringing unprecedented opportunities and challenges for countries everywhere
ECONOMICSGLOBALMay 2016
By: Julia Wang and James Pomeroy
abc
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ECONOMICS GLOBAL
May 2016
An ever-changing story
It could be a trip to Sydney’s Taronga Zoo, a compelling new Korean drama, an upmarket store in
London, a multi-million-dollar footballer, an online payment app, a robot, or an electric car. The
common thread is that all roads, wherever they are in the world, eventually lead to China in some
way or another. It’s just a question of joining the dots.
While the rest of the world may fear a Chinese slowdown, its economy is still contributing more and
more to global growth. The US may be the world's biggest economy but China is the most important,
with its growth and changing tastes having a far reaching impact all over the globe. These
connections are changing, both in terms of size and in shape with countries stretching from Chile to
Australia and Ethiopia to Korea seeing the growing influence of China on their own domestic
fortunes. With China's developing economy, new countries may be the main beneficiaries of the
next leg of China's growth and the increasing demand for higher-end products and services.
These links have become more multi-layered and complex. Whether they concern trade, the flow of
capital, technology, the private sector or tourism, it is this deeper relationship with many different
countries and industries which now has to be understood, beyond the familiar statistics about copper,
chemicals and iron ore. This report sets out to examine these changes and what they mean for
China and the rest of the world.
The first chapter looks at how China is now the world's most important economy in terms of growth,
now accounting for 12% of global GDP and affecting the health of economies in countries all over the
world. The second shows that China is moving up the export value chain and becoming a more
influential global consumer of goods and services, both domestically and overseas. Over time, the
country will become a greater capital exporter due to more overseas direct investment and portfolio
investment. The last chapter looks at a paradox – China is still a poor country despite being the
world's second largest economy. This brings large trade and investment opportunities, as well as
challenges that require greater opening of both markets and minds.
China's contribution to world GDP growth is holding up as growth slows
Note: Real GDP growth. * HSBC forecast for 2016 Source: World Bank, HSBC
-3
-2
-1
0
1
2
3
4
5
-3
-2
-1
0
1
2
3
4
5
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016*
%%
China US Eurozone Other
Contribution to World GDP growth
Executive Summary
All roads lead to China
China's role in the world is changing…
…and its influence is growing
In this document HSBC may comment on the potential economic impact dependent on the outcome of the UK Referendum. HSBC is not taking a political position and this document and the information contained herein are not intended to promote or procure, or otherwise be in connection with promoting or procuring, a particular outcome in relation to the question asked in the UK Referendum.
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As heavy industry and traditional manufacturing wrestle with slowing demand overseas and
overcapacity at home, the new engines of the economy are humming. Social media, cinemas, travel
and R&D are driving consumption, services and high-technology sectors. This is where the new links
are to be found. As we said, you just have to join the dots. Here are just three examples:
It’s a sunny midweek day in Sydney and Taronga Zoo, scenically positioned on the city’s
spectacular harbour, would be quiet but for the large numbers of visitors from mainland China.
This highlights the rapid increase in Chinese tourists (and students) in Australia and the growth
in the number of flights between the two countries. This, in turn, is helping Australia rebalance its
own economy away from commodity sales to, yes, China. Look further down the supply chain
and we find that in April Airbus and Boeing split an USD10bn order for 35 wide-body aircraft
from China Eastern Airlines as the company adds new long-haul routes.
Chile's ever growing relationship with China is evolving once more. Exports to China accounted
for less than 5% of its total at the turn of the century, but that has now grown to more than 25%.
With the burgeoning Chinese middle class, these exports are slowly moving from copper to
wine, owing to the greater demand from dinner parties, restaurants and bars.
From soap operas and cosmetics to food and pop music, the Korean cultural wave known as
Hallyu is washing over China like never before. The latest smash hit Korean television drama,
Descendants of the Sun, was streamed more than 2.3 billion times by Chinese fans in April.
And now there’s another cultural phenomenon to add to the list – cosmetic surgery. These
trends have helped the Korean consumer economy recover after the outbreak of Middle East
Respiratory Syndrome last year.
Similar micro links can be found in high-end manufacturing, sport, and cinema, in the form of robots,
football and corporate hook-ups with Hollywood. Put together with the macro themes of capital flows,
investment and trade evident in ambitious projects such as the Asian Infrastructure Investment Bank
and the One Belt, One Road initiative to create a New Silk Road by land and sea, the ripples are
being felt in almost every corner of the planet.
A big economy, but still a poor one
Source: World Bank. Note: ln is natural logarithm of the data The message is clear – China’s already formidable commercial power is changing as it finds new
markets and creates new channels through which to flow. That is not to understate the importance of
the existing links and the near-term challenges facing the country. Beijing is trying to cut capacity in
heavy industry without stalling the economy. We believe the leadership will maintain enough policy
support to ensure steady growth while pressing ahead with supply-side reforms. But here is the
bigger picture - what the new forces at work in the economic, commercial, financial and demographic
complexity of today’s China mean for the world.
Australia
Brazil
Canada
Switzerland
China
Germany
Spain
FranceUK
Indonesia
India
Italy
Japan
Korea, Rep.
Mexico
Netherlands
Russia
Saudi Arabia
Turkey
United States
US, 1980Japan, 1980
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
4.8
5.0
11.5 11.7 11.9 12.1 12.3 12.5 12.7 12.9 13.1 13.3
GD
P pe
r Cap
ita (2
005U
SD, l
n)
Total GDP (Nominal USD, ln)
New drivers for growth
From football to investment
China continues to evolve
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May 2016
Source: HSBC
China, trade, and the world
12% of global takings for the Batman v Superman film were from China
22%of the world’sworkers are
Chinese
China’s capital stock perworker today is just around
20%of the level of the US
Overseas M&A byChinese companies rose to
USD385bnin 2015, up 213% from
2014
Foreign ownership ofChina’s equity and bond
market is less than
2%
China contributed
47%of global GDP growth in
Q1 2016
China added theequivalent of the entireTurkish economy to its
GDP in 2015
Chinese per-capitaspending in Korea hasdoubled in 10 years
50%of Chinese people live in
urban areas
Chinaaccounts for
30%of global
investment
72%of the world’s
shoes are madein China
85%of China’s FDI
goes to theemerging world
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Slightly slower does not mean less important
China's role in the global economy keeps expanding. Over the past 25 years, it has gone from
11th largest (in nominal USD) to second. The country’s economy is now 60% that of the US,
up from just 13% in 2000. That means its role in determining global demand is critical. In terms
of purchasing power parity (PPP), it is now the world's largest economy. While China’s size and
pivotal role have long been recognised, an increasingly important part of the story is how its
economy is changing and what that means for everyone else.
1. China's role in the world economy is getting bigger and bigger
Source: World Bank
China's bigger share of world GDP means that the economy accounts for a large share of global
growth despite a slower pace of economic expansion (we expect 6.7% GDP growth in China in
2016 and 2017). Although this is well below the rate of close to 20% back in 2010, China is still the
most important source of global demand growth – expected to add more to global GDP than the
US and the Eurozone combined. In Q1 2016, China accounted for 47% of global GDP growth.
China is crucial for the growth rates of many countries
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ECONOMICS GLOBAL
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8. The world's exposure to China has increased enormously
____________ % Exports to China _____________ _______________ % Imports to China ____________ 2000 Latest 2000 Latest Hong Kong 34.5 53.9 43.0 47.1 Australia 5.7 33.7 7.8 20.5 South Korea 10.7 25.4 9.4 17.1 Chile 4.7 24.4 5.1 20.9 New Zealand 3.0 20.0 6.2 17.0 Japan 6.3 18.3 14.5 22.3 Brazil 1.8 18.0 2.2 16.3 Saudi Arabia 2.4 13.3 3.9 13.4 Philippines 1.7 13.0 2.3 15.0 Singapore 3.9 12.6 5.3 12.1 Malaysia 3.1 12.0 3.9 16.9 Thailand 4.1 11.0 5.5 16.9 Colombia 0.2 10.5 1.5 18.4 Indonesia 4.5 10.0 6.0 17.2 South Africa 1.1 9.6 3.7 16.2 US 2.1 7.6 8.6 19.9 Russia 5.1 7.5 1.9 15.1 Argentina 3.0 6.6 4.6 16.2 Germany 1.6 5.8 3.4 6.6 India 1.8 4.2 2.9 12.7 Switzerland 1.0 4.1 1.7 6.5 Canada 0.9 3.7 3.2 11.5 France 1.0 3.7 2.3 5.1 UK 0.8 3.5 2.2 8.9 Sweden 2.1 3.3 1.3 5.3 Italy 0.9 2.6 2.7 7.3 Nigeria 0.5 2.6 4.3 25.6 Norway 0.4 2.3 3.1 9.6 Turkey 0.3 1.8 2.5 10.3 Spain 0.5 1.7 2.6 6.1 Mexico 0.1 1.5 1.6 16.6 Poland 0.3 1.0 2.8 6.5 Source: HSBC, IMF DOTS. Note: shows that share has more than doubled, is a smaller increase. Ordered by current share of exports to China.
The key thing from table 8 is the speed at which China's role in the performance of other
countries is changing. While China's share of global imports has risen from 3% in the mid-1990s
to around 9% today, the change so far has been concentrated in the emerging world.
For example, Chinese demand now accounts for roughly a quarter of Chilean exports compared
to just 5% back in 2000. It is also striking how low a share of western exports China currently
makes up. As chart 9 shows, the emerging markets are, in general, punching well above their
weight in terms of their share of China's imports compared to their size in the global economy.
China and Brazil: China has become the number one destination for Brazilian soy beans,
which is one major factor leading to deforestation. The huge demand from China (29% of
Brazilian soy beans exported to China) has meant an increase in the land used for farming
them. In turn this has displaced other agricultural farms, which exacerbates deforestation.
China's impact is being felt mainly in the emerging world
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9. China's imports are disproportionately from emerging markets
Source: IMF DOTS, World Bank
Source of so much demand
And given the huge share of GDP that exports to China now represent in the GDP of some of
these emerging markets, China's growth rates will have a profound impact on local growth rates.
Using the relationship between Chinese import growth and GDP growth, we can see the impact
that a different pace of Chinese growth may have on other countries. For example, Chinese
demand may push up Korea’s headline GDP by anything between 0.2 and 1.8ppts depending on
the pace of growth in China, all other things being equal. This is substantial, and suggests that
the world will continue to be reliant on China's domestic economy to spur growth overseas.
10. China's growth rate implications to local growth
Exports to China contribution to local GDP growth for different Chinese growth rates
China GDP growth 12% 10% 8% 6.7% 6% 4% 2% 0% -2%Australia 1.0% 0.9% 0.7% 0.7% 0.6% 0.5% 0.4% 0.2% 0.1%Korea 1.8% 1.6% 1.4% 1.2% 1.1% 0.9% 0.7% 0.4% 0.2%New Zealand 0.8% 0.7% 0.6% 0.5% 0.5% 0.4% 0.3% 0.2% 0.1%Saudi Arabia 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1%South Africa 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% 0.2% 0.1% 0.1%Chile 1.2% 1.0% 0.9% 0.8% 0.7% 0.6% 0.4% 0.3% 0.1%Note: Shows countries where Exports to China are a large share of GDP. Assumes that Chinese import growth = 3.5%+0.87*GDP growth, based on 20 years of data. Source: HSBC calculations, UN Comtrade, World Bank.
For most developed markets, where exports to China are a tiny share of total GDP, there is
clear scope for the contributions from China to rise substantially and support future growth.
New China, new winners
As the Chinese economy develops, this will surely change. The UK, for example, exports a lot of
services (12% of GDP) and these primarily go to the US, Germany and the Netherlands.
China's imports are largely made up of goods, mainly from other developing countries. As
China's demand shifts towards services and higher value products such as pharmaceuticals,
this may prove a boost for western economies. Those countries that haven't benefited from a
growing China in the early part of this decade are now starting to do so. Just look at growth
numbers in countries such as Australia, where the influx of Chinese tourists is having an impact
on services exports and headline growth.
We noted earlier that Chile has benefited considerably over the past few decades as China's
demand for copper and other metals has risen. Could we expect something similar for
developed countries? The changing shape of domestic demand within the Chinese economy,
which we outline in the next chapter, will have a profound impact on where benefits from China
surface over the next year or so.
22%
0%
2%
4%
6%
8%
10%
12%
0%
2%
4%
6%
8%
10%
12%
US
UK
Ger
man
y
Japa
n
Can
ada
Italy
Indi
a
Chi
le
Sout
h Af
rica
Saud
i
Indo
nesi
a
Rus
sia
Share of Chinese imports Share of World GDPDM EM
The pace of Chinese growth matters profoundly to the economies of other countries
A developing China will bring new tastes
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ECONOMICS GLOBAL
May 2016
Look at the breakdown of Chinese imports over the past couple of decades compared to those
by the US. There is clearly a trend for them to converge, and we can see which countries should
benefit from both future Chinese growth and the changing Chinese tastes. The table in the
Appendix shows exports by product for key markets. It is clear which have benefited from
Chinese growth over the past few decades: commodity exporters and producers of heavy
machinery, which includes much of the emerging world, plus Canada, Germany and even Japan.
11. China's import mix is very different to a developed market
Source: HSBC calculations, UN Comtrade, World Bank
However, on the other side are those countries where there is clear scope to be winners over
the next decade or so. The UK stands out here, with services accounting for a much bigger
share of exports than all of the traditional China-centric categories. Others that look promising
future beneficiaries of Chinese growth are Switzerland, India, the Philippines and France.
This, of course, depends on whether Chinese markets open up. While China's transition should
in theory be good for exporters of higher value products, with the current level of trade
restrictions that is not the case. It is currently difficult for some western suppliers to access the
Chinese market even though they may be globally-competitive. See Trading up: Services
exports, a bright spot in the gloom, 21 April 2016.
The new influence
The changing nature of China’s interaction with the world is already evident. As we outline in
chapter 2, the new-look domestic economy is already opening fresh channels to the rest of the
world. From more and more Chinese tourists arriving in London, Sydney and New York to
Chinese foreign direct investment (FDI) in Africa, the expanding role China plays in the world
is clear.
The reach of China is also influencing various markets we wouldn't associate with China – from
football to wine and movies to investment. The new China is extending its influence in the world
in ways we haven't seen before, and that trend will only continue.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
US
China
Share of imports by product (% total)
Crude Commodities (ex Fuel) Fuels Machinery & Transport equipmentOther Goods Travel services Insurance servicesTransportation Services Business Services Other Services
Chinese imports are commodity heavy, US imports are service heavy
Chinese trade restrictiveness is a barrier to global growth
The remarkable rise of China over the past three decades has given rise to many sayings. They
include “sleeping giant” and “dragon” awakening and the observation that the country has become
“the world’s factory”. And there’s that one that is often used when talking about America – when it
sneezes, the world catches a cold. In the previous chapter we discussed many of the
developments that have given rise to these aphorisms, but we stressed that it is not purely about
size and we pointed to the important changes taking place in China’s domestic economy and its
relationships with other economies. In this chapter, we look more closely at those changes, in
particular the country’s role as a large exporter, a global consumer and an aspiring investor.
Moving up the value chain
In 2001, two decades after the monumental decision by Deng Xiaoping to 'reform and open up',
China joined the World Trade Organisation. Its integration into the global trade system led to
dramatic shifts in the patterns of supply and demand in the global trade system, and boosted global
trade volume. By the time the Global Financial Crisis struck in 2008, China was producing more than
40% of all men and women's clothing, over a third of all toys and the country’s share of global
exports was 8.7% (Chart 12). The temporary disruptions of the crisis notwithstanding, by 2014 that
figure had reached 12.4%. No other country, with the exception of the US in the period following the
Second World War, has ever been such a large part of the global trade system.
12. Factory of the world 13. Moving up the value chain
Source: CEIC, HSBC Source: CEIC, HSBC
0
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1995 2000 2005 2010 2015
%
China % world exports
0
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20
30
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20
30
1995 1998 2001 2004 2007 2010 2013
% of Global market share
TotalCommoditiesChemicalsManufactured goodsMachinery and transport equipmentMiscellaneous
Maker, buyer, investor
From toys to machines, China's exports are moving up the value
chain
Increasingly, China is becoming a more influential global consumer
of goods and services, both domestically and overseas
Over time, China will become a greater capital exporter through more
overseas direct and portfolio investment
The rise of the 'world's
factory'
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The story now is that China has been increasingly moving up the value chain. In 1995,
labour-intensive products such as toys and shoes (grey line in chart 13) accounted for 36% of
China's overall exports. By 2015, this share was down to 26%. Meanwhile, the share of
machinery and transport equipment (blue line) increased from 21% to 46% over the same
period. Soon this transition was starting to have a global impact. Chart 13 shows China's world
share by product. Although China's world market share had increased quite steadily for most
categories of products, it is the improvement in machinery and transport equipment that is the
most striking. In two decades, China's global market share rose from a mere 4% to 17%.
Incidentally, this is how China has increasingly earned more in terms of trade surplus vis-à-vis
the rest of the world (Chart 14).
14. Trade surplus by products
Source: CEIC, HSBC
China and Australia: As China’s growth shifts from being investment-led to consumer-driven,
Australia’s economy is shifting its growth from the mining sector towards the non-mining
industries. The close ties to China kept Australia from recession through the financial crisis.
See: Australia's next opportunities in China: Moving beyond resources (4 November 2015) for
more information.
15. Gaining some, losing some
Source: CEIC, HSBC. Note: Iron/Steel was 0% in 2006-07. Those on right hand side show gaining market share, those on left show falling and small market shares.
-1,000
0
1,000
2,000
2000 2005 2010 2015
China's trade surplus by product, USDbn
Mfg: Machinery and Transport Equipment Mfg: Misc Mfg ArticleMfg: Unclassified Goods PP: Food and Live AnimalPP: Beverage and Tobacco PP: Crude Material, Inedible , Except FuelPP: Mineral Fuel, Lubricant & Related Material PP: Animal and Vegetable Oil, Fat and WaxMfg: Chemical and Related Product Mfg: Manufactured Goods
In more recent years, a decrease in China’s commodity exports has become another noticeable
trend. Chart 15 shows China's declining dominance in the exports of primary commodities and
metal products and an improving market share in manufactured goods such as lighting,
telecoms, etc.
So, where might China's trade go from here? On most metrics, China's export industry still has
much room for improvement. China has recognised that it needs innovation to move up the
value chain. It needs to differentiate its products through advances in technology, design or
other attributes. The recent five-year plans have included elements related to innovation, R&D
and even intellectual property rights. The transition from a low-cost producer to one that
increasingly makes more value-add is a longer-term trend that has just begun and it is by no
means an easy one. Greater openness to foreign investment, as well as domestic reforms, will
help make this process a smoother one.
And for other emerging markets, China moving up the value chain creates opportunities.
Countries in parts of Africa and Asia with lower costs of production will likely benefit from a
production shift away from China and towards even lower cost bases. China's rise up the ladder
may pull a few countries with it.
The middle class decade
Although China's role as the 'world's factory' is more well-known, in recent years the increasing
size of its economy, and rising affluence of the middle class had also attracted global attention.
In fact, China has always had a large group of consumers. Chart 16 shows consumption and
saving as a share of national GDP since 1955. Before the 'reform and opening up', China had
an arguably more consumption-driven economy. In fact, as late as 2000, consumption was as
much as 60% of the economy. As a result of a larger industrial sector, consumption’s share of
the economy then started to decline, to about 49% in 2010, before returning to 51% in 2014.
Therefore some of the perceptions of China as a very under-consumed economy where a lot of
pent-up demand can be instantly released with the right policies are rather misplaced.
Moreover, there have been some signs recently that slower economic growth is putting some
cyclical pressures on household consumption growth. From an economic perspective, this is not
surprising. After all, a slowing economy weighs on corporate profitability, which may be
translated into lower wages and/or employment.
16. The consumers were always there 17. Some cyclical concerns
Source: CEIC Source: CEIC
Despite some cyclical challenges, however, China's consumption is a structural story that is
more linked with growth in the economy, and rising group of middle class consumers. In Table
18, we estimate how many more middle class consumers there may be in China over the next
decade as a result of continued economic growth. We use a standard threshold that defines
0
20
40
60
80
100
0
20
40
60
80
100
55 60 65 70 75 80 85 90 95 00 05 10 15
% GDP% GDP
National saving rate Consumption
0
5
10
15
20
25
0
5
10
15
20
25
03 04 05 06 07 08 09 10 11 12 13 14 15
% YoY% YoY
Income growth retail sales growth
The transition has only just begun
New-found purchasing power of consumers
60-80% of China's urban population will be 'middle class' by 2025
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ECONOMICS GLOBAL
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urban middle class as earning USD12-50 per day. In 2015, just over 40% of the urban
population had an income in this range. Using the conservative assumption that household
incomes grow 6.5% per year from 2016 to 2020 and 6% from 2021 to 2025 (compared with 8%
in 2015), this implies over 60% (and probably close to 80%) of the population will meet this
criterion by 2025.
The implications are large. Chart 19 shows China's share of global imports in key product types.
China's purchasing power has extended into just about every product type over the past
decades. Its role as a large consumer is keenly felt in commodities, but it is also a major
consumer of general machineries due to large investment needs. Chart 19 shows examples of a
few products where China has increased its share of global consumption in recent years.
Where do we go from here? What will the new middle class, with their newly gained affluence
buy? Think 'consumer discretionary', in other words, the less necessary and more fun things in
life. Chart 21 shows a comparison of China vs US consumer spending patterns.
19. China is a large consumer… 20. …with changing import needs
Source: UNCTAD, HSBC Source: UNCTAD, HSBC
For a typical Chinese consumer, food accounts for around a third of monthly expenses. That is
followed by clothing and accommodation, making up another third. For the typical American
consumer, on the other hand, these items combined take up only a third of total monthly
expenses. By comparison, the US consumer spends nearly 40% on education, culture,
recreation and a whole host of other miscellaneous activities whereas their Chinese
counterparts spend less than 14% on these items. As China’s income levels continue to rise,
the larger group of more affluent middle class consumers will increasingly make more
discretionary purchases.
0510152025303540
05
10152025303540
Total Crudematerials
Mineral fuels Machinery
% Global market share
1995 2005 2014
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
Milk products Iron ore Aircrafts Photographicequipment
% Global market share
1995 2005 2014
18. The rising middle class
Disposal income per capita, by percentile, RMB 20% 40% 60% 80% 100%2015 1,798 3,148 4,270 5,709 9,8722020 2,463 4,314 5,850 7,822 13,5262025 3,296 5,773 7,829 10,467 18,100Source: CEIC, HSBC
The less necessary, and fun things in life
Consumer tastes are changing
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May 2016
21. More discretionary spending
Source: CEIC, HSBC
Heading overseas
One other aspect of consumption that is sometimes overlooked is overseas spending. Domestic consumption is large and growing, but overseas consumption by Chinese consumers is growing at an even faster pace. The increase in the numbers of the middle class in China means that a large part of the global population is experiencing a material impact on its income and tastes. In 2015, 120 million Chinese tourists went overseas.
One way to analyse this development is to look at China’s Balance of Payment data. Chart 22 shows how these have changed over time. Prior to the 2008-2009 Global Financial Crisis, China's services account was in sizable surplus. But since 2011, this has turned into an increasingly large deficit. As of 2015, services outflow amounted to nearly 2% of GDP. The biggest driver behind the increase in the deficit is tourism spending. Chart 23 shows that the biggest chunk of the deficit comes from tourism, with transport spending a closely related item. This is another trend that will undoubtedly become more important in the coming decade driven by a larger number of more affluent middle class consumers.
36. The Chinese Super league is becoming a major player in world football
Source: Transfermarket.com. Note: *2016 is January transfer window only, other years include summer.
Even for European football the rise in the number of Chinese fans is significant. The English Premier League estimates that 350m Chinese watch matches while in terms of stadium attendances the average CSL team now attracts more fans to its games than do Spain's top flight.
Football also plays a big role in international investment. Chinese investors now own 13% of Manchester City (England), 20% of Atletico Madrid (Spain) and 60% of Slavia Prague (Czech Republic), suggesting that China's influence in the world's most popular sport is still growing ahead of plans to apply to host the World Cup in the not too distant future.
A starring role It's not just football. The rising Chinese middle class now accounts for a sizeable share of global box office revenues for Hollywood movies. As recently as 2007, Chinese viewers accounted for just 2% of the global takings for movies such as Casino Royale or Harry Potter and the Order of the Phoenix. However, in recent years the share has risen to over 10% for most films and appears to be on the rise (eg Kung Fu Panda 3 hit 30% this year).
37. Going to the movies
Source: Boxofficemojo. Note: Shows selected high grossing US films from the past two years plus some comparisons from 2007.
This has come about as a result of the change in tastes of wealthier consumers. The Motion
Picture Association of America (MPAA) estimates that Chinese box office takings of US films
grew 34% y-o-y in 2014, and local regulators suggest that the pace of growth was even faster,
at 48.7% in 2015. China's film market could well overtake North America in the next couple of
years, although a large share of that demand is for local films.
0
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60
70
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013 2014 2015 2016*
GBPmGBPm Record transfer fee by calendar year
Chinese Super League English Premier League
01020304050
01020304050
Batm
an v
s Su
perm
an(2
016)
Kung
Fu
Pand
a 3
(201
6)
Aven
gers
: Age
of U
ltron
(201
5)
Jurra
sic
Wor
ld (2
015)
Star
War
s: F
orce
Aw
aken
s(2
015)
Furio
us 7
(201
5)
The
Hob
bit:
Battl
e of
the
Five
arm
ies
(201
5)
Mis
sion
Impo
ssib
le: R
ogue
Nat
ion
(201
5)
Tran
sfor
mer
s (2
007)
Har
ry P
otte
r and
the
Ord
erof
the
Phoe
nix
(200
7)
Cas
ino
Roy
ale
(200
7)
%% Share of worldwide box-office takings
China US
350m Chinese fans watch English Premier League matches
Chinese movie fans are now driving revenues
Box office takings grew 48.7% in 2015 in China
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ECONOMICS GLOBAL
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24
Sharing a bottle
Following the fall in wine sales in 2013-14 as part of the clampdown on corruption, wine imports
to China fell quite sharply. But as the middle class continues to emerge, we have seen a
continued surge in sales to China, not just from France but also Spain and Chile, while China
itself has started to satisfy its own demand by becoming a large producer. For example, Chilean
exports of wine to China have doubled in value over the past four years.
Alongside wine, Chinese demand for other alcoholic beverages continues to rise, with beer
imports rising 10-15% y-o-y and Diageo, the world's largest spirit maker, claiming that half of the
company's sales growth would come from Asia, including China, in the future.
Wine demand is back while spirits are lifted
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ECONOMICS GLOBAL
May 2016
Still a catch-up story
Despite its increasingly large global influence, China is in many ways still a classic 'developing
economy'. With per capita GDP at less than USD8000, there are also significant regional
variations. The richest province, Tianjin, has a GDP per capita of USD16,189 as of 2014.
Affluent cities such as Beijing, Shanghai and provinces such as Jiangsu and Zhejiang are not
far behind. On the other hand, Gansu province, for example, has a GDP per capita of only
USD4,098. Closing these gaps, as well as the gap between rural and urban income will unleash
significant potential that will help China through the next leg of 'catch-up growth'.
38. A classic 'convergence' story 39. Three inputs to growth
Source: CEIC, HSBC. Note: Shows China so far, and what followed in other countries in subsequent years through 1970 to today
Source: CEIC, HSBC. Note: TFP = Total Factor Productivity
Chart 38 shows the growth in China's GDP per capita over the past decades. In classic growth
theory, an economy's potential growth is determined by its distance from the 'frontier economy', or
the richest economy in the world. Here we take the US as the benchmark. From this perspective,
China has been largely following in the developmental footsteps of the Asian Tigers such as Japan,
Korea and Taiwan. Despite China's growing influence, its GDP per capita suggests that its current
developmental stage is similar to that of Japan in the 1950s, and Korea in the 1980s.
0
20
40
60
80
100
120
0
20
40
60
80
100
120
1950196019701980199020002010
China KoreaTaiwan Japan
% GDP per capita as % of US
-5
0
5
10
15
20
-5
0
5
10
15
20
1995 2000 2005 2010 2015 2020
%%
TFP CapitalHuman capital Potential growth rate
Large but poor
As a developing economy with per capita GDP of just USD8,000, China still has a lot of 'catch-up growth' to do
Being both the second largest economy but also a poor country is an unprecedented paradox
This brings big trade and investment opportunities and challenges that require greater openness of both markets and minds
China is still a classic developing country
China is like Japan in the 1950s and Korea in the 1980s
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ECONOMICS GLOBAL
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40. Capital accumulation… 41. ...to close infrastructure gap
Source: CEIC, HSBC. Note: Shows China so far, and what followed in other countries in subsequent years through 1970 to today
Source: CEIC, HSBC. Shows infrastructure density as a share of the US. So US= 1, the others are as a ratio to the US.
How would the 'catch-up growth' be realised? Chart 39 illustrates the three classic inputs to
economic growth – human capital, capital and productivity. Since the 'reform and opening up',
China has largely grown on the back of the accumulation of capital stock as well as
improvement in productivity growth. On the ground, the two forces go hand in hand. The
opening up of the economy has led to a large inflow of foreign direct investment, from global
companies that were keen to leverage on China's labour cost advantage and economies of
scale. Increasingly, as we showed in Chapter 2, they moved into more capital-intensive
production of electronics and machinery. Factories sprung up to produce the toys, bags and
shoes that marked the initial phase of China's export take-off. The job opportunities attracted
urban migration that reached a peak of 13 million per year just before the 2008 Global Financial
Crisis. Even today, a labourer who moved from the farm to the production chain increased
his/her productivity by four times. The differential was likely much bigger back in the 1990s.
Has this growth model that featured a virtuous interplay of capital accumulation and productivity
growth run its course? The data suggest that there is still some way to go. Chart 40 shows that
China's capital stock per worker is just around 20% of the level of the US. This is not surprising
given China's relatively low GDP per capita. But it is an important reminder that the room for further
improvement in the capital stock remains large, as it should be, for a developing economy.
42. China’s work force is shrinking… 43. …but better educated
Source: CEIC, HSBC. Note: Shows annualised change throughout each period in the number of people in each age bracket.
Source: CEIC, HSBC
0
20
40
60
80
100
0
20
40
60
80
100
1950196019701980199020002010
China KoreaTaiwan Japan
% Capital stock per person as % of US
0
0.2
0.4
0.6
0.8
1
0
0.2
0.4
0.6
0.8
1
RailDensity
Air Energy RailDensity
Air Energy
1990
China EM Asia (Average) US
2014
2010-2014 2015-2019 2020-2024 2025-2029-1.0
-0.6
-0.2
0.2
0.6
1.0
1.4
-1.0
-0.6
-0.2
0.2
0.6
1.0
1.4%%
16+ 16-64 20-64 20-59
0
2
4
6
8
10
12
0
2
4
6
8
10
12
1970 1980 1990 2000 2010
y earsy ears
New joiners' avg. years of schoolingLeavers' avg. years of schooling
There are plenty of ways to catch up
The capital stock is still low
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ECONOMICS GLOBAL
May 2016
What does this mean on the ground? Chart 41 shows three types of infrastructure capital — rail
density, air travel and energy consumption. From being a densely populated and significantly
under-developed economy in the 1990s, China has made significant progress in terms of
improving its infrastructure. But more is clearly needed. Many look at the kilometres of road and
rail track that China builds every year, and suggest that the benefits must increasingly look
dubious. But China's population density is amongst the highest in the world, and six times that
of the US. Infrastructure investment that improves connectivity in a densely populated economy
can yield much higher positive and external benefits to the economy. This is why the per-capita
measure is important. On this metric, China still needs to do a lot more, in order to move from a
'developing' to a 'developed' economy.
The demographic question is also frequently discussed. The working population (defined as
those aged between 16 and 64 years old) will start to contract in 2016 (Chart 42). We expect
this pace to pick up modestly to around -0.2% per year in the next five years. This aging
process will bring fundamental changes to a society's consumption patterns and lifestyles. But it
is the impact on growth that gives rise to the biggest worry. True, an ageing population will
subtract modestly from growth. But we need to bear in mind the improvement in the quality of
the labour over the past decade. Chart 43 shows the sharp differences between a worker's
average years of education over just four decades. As a result of the rapid improvement in
educational attainment, China's average years of education have increased from less than 6
years in the 1970s to 11 years in 2010. We estimate that once the return on these education
improvements are factored in, the demographic drag lessens by a half (see China's labour
market puzzle, 23 January 2015).
Urbanisation is the way out
That China has room to grow is not a controversial topic. But many have asked, where will that
growth come from? In other words, what are the economic opportunities that will enable China
to capitalise on its still under-developed capital and labour force and keep growing?
The biggest driver is urbanisation. China's urbanisation rate today is just 50%. Within the urban
population, around 270m are migrant workers who work and live in urban areas without
entitlement to urban social services, such as public housing, healthcare and pensions.
Excluding these migrant workers, only 34% of China population are urban residents. That this
wave of migration has gone on for more than a decade, moving an average of 7m people per
year from rural to urban areas, is a testament to the vast economic force that is at play and the
appeal of a better life.
China and Chile: Although 25% of its exports go to China, Chile is changing the mix, with wine
exports up more than 30% in 2015.
Demographic drag partly offset by better education
Another decade of higher-quality urbanisation is key to escaping the 'middle income' trap
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ECONOMICS GLOBAL
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40
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Global
Global Chief Economist Janet Henry +44 20 7991 6711 [email protected]
Main contributorsJulia Wang Economist, Greater China The Hongkong and Shanghai Banking Corporation Limited +852 3604 3663 | [email protected]
Julia Wang joined the Asian economics team in April 2014. Prior to that, she worked in the Asia FX strategy team as a member of HSBC’s 2012 graduate programme. She has a bachelor of arts degree in philosophy, politics and economics from Oxford University and a master’s degree in economics from University College London.
James Pomeroy Economist HSBC Bank plc +44 20 7991 6714 | [email protected]
James is a global economist at HSBC. He joined the Economics team in 2013 having previously worked within the Asset Allocation research team. His global work focuses on longer-term trends and themes, with a particular interest in demographics data. Alongside this, he provides economics coverage of Scandinavia. James holds a BSc in Economics from the University of Bath.
Issuer of report:The Hongkong and Shanghai Banking Corporation Limited
